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The Business Strategy of Network Effect & Its Impact on Your Ability to Scale Your Small Business

Posted by Jackie Nagel, Synnovatia

If there is one objective shared by almost every small business owner, it would be the capability to scale their small business. Scaling, unlike growth, allows you to increase your revenue substantially. Minus the addition of significant costs, profits are greatly enhanced.

Growth, in comparison, means adding resources or infrastructure to handle greater demand. A growth in revenue is generally accompanied by an increase in cost. Subsequently, although your business revenue grows, you may not experience a growth in profitability – or scalability.

One of the best ways to make your business scalable is to apply the business strategy of network effect.

business_strategy_network_effect

Say What!? What is Network Effect?

Network effect first came into being as early as 1908 when Theodore Vail, the first president of Bell Telephone, gained a telephone monopoly. It was later popularized in the tech industry by such giants as Robert Metcalfe of 3Com and Rod Beckstrom of ICANN.

Essentially, it’s a phenomenon whereby a product or service gains more additional value the more people use it.

Examples of today’s network effect include Airbnb, Google, and Facebook (although it's arguable — and a matter of personal opinion — of the additional value of Facebook). Certainly, the internet, itself, is a good example.

When the internet was first conceived, there were few users. Those who were online derived value from its use. However, as more and more of us went online, the value of the internet to everyone online increased exponentially.

The Value of Network Effects for Small Business

Let’s face it, as a bootstrapped solopreneur in the service industry, you trade time for money. Your business model very likely looks like that of a lawyer, accountant, designer, or consultant. It requires you to be there — to be present — and put in time to generate revenue. You and your client exchange time and expertise for money. It’s that simple.

The problem with this model is that there are only so many hours in a day. Even at that, few service-based professionals are 100% billable. It doesn’t take long before your ability to generate revenue is capped.

Granted, you can hire other skilled professionals to grow your revenue capability. However, it's merely a "rinse and repeat" of the same model with revenue capability capped as the number of billable hours is achieved for each person in your employ. Economies of scale are difficult, at best.

And, if you’re like many of the business owners I chat with, you really don’t want to be managing a gaggle of people. Thanks, but no thanks.

The application of network effect for the small business owner with minimal resources can create a huge advantage in your ability to scale. As more users are added, greater value is created by and for all users.

This dramatically reduces your individual work load and requirement to be ever-present. Plus, costs are easier to control and maintain making your product/service more affordable. This affordability factor attracts more users and the entire cycle repeats itself.

Additional users => more use => additional value created for all users => cost containment => greater affordability => further users.

Me, too?

Not every business can, nor should they, attempt to inject network effect into their business model. But, for those who can — and should seriously consider doing so — here are a few considerations as you begin the process.

1) Consider what type of product or service is currently being used by a high volume of people and considered valuable and incorporate that particular product or service into your business. An example might be a credit card.

2) Study the most valuable product or service that your business provides that currently engages the most users. Consider how you might leverage that product or service using network effect.

One of the most valuable services being generated by most service-based professionals today is content — good, quality content. In fact, although the internet is choking itself on an overabundance of content, the truth is that most of it is not good or helpful to the end user.

New Call-to-actionBy leveraging your content to inform, educate, and spark conversations among readers, you begin to create greater value for everyone who consumes your content. The conversations and contributions made by other readers expands the knowledge and understanding of the topic, beyond your original contribution — as long as, of course, that quality (content and user) is upheld.

3) Focus on one target customer in one location and perfect the model…like McDonald’s did before becoming a franchise behemoth. Create your micro niche.

4) Set up conditions for other people to collaborate and connect and cause each other to grow. Consider how each new client (aka user) can be made more valuable to each and every client.

The Bottom Line

Henry Ford said, Coming together is the beginning. Keeping together is progress. Working together, is success.” By leveraging the increasing value of your product or service as the number and quality of users grows, you can more quickly scale your small business…with less work needing to be done by you!

Tags: Business Success, Business Growth, Scale Small Business, Small Business Strategy

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